Question 1

With added competition, firms prefer not to offer the availability of credit sales to their customers.

Accepted Answer

With added competition, firms may actually increase their offering of credit sales in order to remain competitive and attract customers.

Question 2

When a firm is owed money, the financial manager tries to collect as early as possible.

Accepted Answer

This is true as the earlier the firm collects the money, the better the firm's cash flow position and ability to finance its operations. Delayed payments can lead to cash flow problems and affect the firm's ability to pay its own bills or pursue growth opportunities.

Question 3

Sound financial management involves determining the most appropriate sources of funds to meet short-term and long-term needs of an organization.

Accepted Answer

Sound financial management involves not only managing funds efficiently but also securing the appropriate sources of funding to meet an organization's short-term and long-term financial goals. Therefore, the statement is true.

Question 4

To improve cash flow and profitability, effective managers attempt to minimize the firm's investment in inventory.

Accepted Answer

Minimizing inventory investment can help improve cash flow as it reduces the amount of money tied up in stock that may take time to sell. Additionally, it can improve profitability by reducing the costs associated with storing and managing excess inventory.

Question 5

Finance managers need funds for capital purchases, but seldom for the day-to-day operations.

Accepted Answer

Finance managers need funds not only for capital purchases but also for day-to-day operations to cover expenses such as payroll, inventory purchases, and overhead costs.

Question 6

Gavin, a financial manager of a small firm, needs to determine how much his company will have to borrow in the coming months. He also needs to establish when the borrowed funds will be needed. The preparation of the cash budget will help.

Accepted Answer

The cash budget shows projected revenues, expenses, and cash balance for a specific period of time, usually one month or one quarter. It provides insight as to whether the firm needs to borrow in the short term in order to pay for expenses for the same period.

Question 7

The cost to a retailer of accepting credit cards is generally greater than the benefits provided.

Accepted Answer

While retailers do incur costs such as transaction fees and equipment costs for accepting credit cards, the benefits provided such as increased sales and customer convenience typically outweigh these costs.

Question 8

Acquiring and storing inventory represents a sizable expenditure for many businesses.

Accepted Answer

Acquiring and storing inventory requires a significant investment of money and resources, making it a significant expenditure for many businesses.

Question 9

The concept of the time value of money is based on the interest-earning power of money.

Accepted Answer

The time value of money relates to the idea that money available at the present moment is worth more than the same amount of money later in the future, due to the earning potential of investing the money over time. This earning potential is linked to the concept of interest, making option A true.

Question 10

Portable Pet Care, Inc., a mobile veterinary clinic, is planning for the future. The company owners (two seasoned veterinarians) have brought together the vice president of marketing and the director of information systems to talk about their expansion campaign, "We come to you!" The talks are in the preliminary stages, so there is no need to concern the finance team at this time because cash flow is currently not a problem.

Accepted Answer

Forecasting for the future is an important part of any firm's strategic plan. If a firm is planning to expand, it is important to begin creating long-term forecasts, where the firm predicts revenues and expenses for periods longer than one year, sometimes 5 to 10 years out.

Question 11

Accepting credit cards, such as MasterCard or Visa, enables a firm to decrease the expense of extending credit to customers.

Accepted Answer

Accepting credit cards shifts the risk of extending credit to the credit card company and frees up the firm's resources that would otherwise be spent on managing credit accounts and collections. Therefore, it can decrease the expense of extending credit to customers.

Question 12

Snowy Mountain Ski Lodge's cash budget for the month of March 2019 shows a negative amount. Due to the fact that the months of January and February were quite lucrative and showed positive amounts, the finance manager will not borrow any money in the short term to cover for March's deficit.

Accepted Answer

The statement suggests that Snowy Mountain Ski Lodge is not planning to borrow any money to cover the deficit, which is false. It is likely that they will need to borrow money to cover the negative balance in March, even if previous months were profitable.

Question 13

While firms finance their long-term needs with debt financing, their short-term needs are served by equity financing.

Accepted Answer

While firms may use equity financing to meet short-term needs, it is more common for them to use debt financing or other forms of short-term financing such as lines of credit, trade credit, and factoring. Equity financing is typically used to raise funds for long-term needs such as capital expenditures, mergers and acquisitions, or debt refinancing.

Question 14

Short-term financing refers to borrowed funds that must be repaid in a year or less.

Accepted Answer

Short-term financing is defined as borrowed funds that are expected to be repaid within a year or less. This type of financing is often used for working capital needs, such as inventory purchases or payroll expenses. Examples of short-term financing include lines of credit, trade credit, and commercial paper.

Question 15

Lydia is a financial manager with Securitas Financial. She regularly compares actual revenues and expenses against their projected values. After identifying areas with significant deviations from planned values, she investigates to find the cause of these variances. Lydia's activities represent the steps involved in the preparation of Securitas's capital budget.

Accepted Answer

Karen is involved in financial control, which is the process of comparing actual revenues, costs, and expenses against their projected values. The control process helps financial managers identify deviations and take corrective action when necessary. The capital budget is a projected statement of the number and types of fixed assets required to run the operation over a specified period of time.

Question 16

Snowy Mountain Ski Lodge owners know that the lifts on the north slope will need replacing in the next two years. Three months prior to replacement, they will include the expenditure in their cash budget.

Accepted Answer

Chair lifts would be considered a capital budget item-a major capital expenditure for a ski lodge. A major purchase such as this would be part of the capital budget in the company's financial plan.

Question 17

Capital expenditures are major investments in long-term assets such as property and equipment.

Accepted Answer

Capital expenditures are defined as major investments made by a company in long-term assets such as property, plant, and equipment with the intention of improving the efficiency of the business or expanding its operations.

Question 18

Effective financial managers evaluate customers' ability to pay for merchandise purchased on credit.

Accepted Answer

Evaluating customers' ability to pay for merchandise purchased on credit is an important aspect of effective financial management. This helps reduce the risk of bad debt and ensures that the business maintains a steady cash flow.

Question 19

One very important responsibility of the finance department in both large and small businesses involves acquiring needed funds to operate the business.

Accepted Answer

The finance department plays a critical role in acquiring the necessary funds to support the operations of the business, whether it's a small or large business. This involves seeking out investors, securing loans, managing cash flow, and forecasting revenue and expenses to ensure the business stays financially stable.

Question 20

Financial managers generally oppose credit sales because of the impact on cash flows.

Accepted Answer

Financial managers do not generally oppose credit sales as they allow for increased revenue and potential for future business. However, they do need to carefully manage cash flows to ensure that they can collect on the credit sales in a timely manner and maintain adequate cash reserves.

Quiz 18: Financial Management